AMD Q4 and Fiscal 2013 Earnings, How Will AMD Stay Profitable in 2014?

As some of you may know, AMD [NYSE:AMD] reported their fourth quarter and annual earnings for the fiscal year of 2013. In the 4Q 2013, the company reported $89 million in profit on $1.59 billion, which represents a profit margin of a meager 5% which is still better than the losses that they had reported in previous quarters. AMD had pledged a return to profitability, which they successfully attained. Not just that, but AMD increased their operating income and profit by around $40 million over the previous quarter. Compared to a year ago, when AMD lost $473 million on $1.16 billion in revenue, the company is clearly indicating some sort of a turnaround. AMD also increased both their revenue both year over year and sequentially, which shows a clear growth of their business as opposed to a shrinkage like in previous quarters.

Now, if you look at AMD’s annual figures, they better than 2012’s figures. In 2013, AMD posted an $83 million loss while managing an operating income of $103 million on $5.3 billion in revenue. Juxtaposed against 2012, where AMD posted a loss of $1.18 billion loss on an operating loss of $1.06 billion and 5.42 billion. So, AMD has not quite yet reached a full year of profitability quite yet, but if they have enough positive quarters they will have fully complied with their promise of ‘return to profitability’. A lot of this strength in 2014 clearly came from the fact that AMD sold more GPUs than their partners could make as a result of shortages created by runs on AMD GPUs generated by cryptocurrencies. Those GPU sales in conjunction with AMD’s position within the Xbox One and PlayStation 4 as the sole provider of both CPU and GPU architecture resulted in a much stronger quarter and bouyed the company from losses in their PC group.

The Compution Solutions business unit reported a decrease of 9% sequentially and 13% year over year. AMD noted that this was a result of lower chipset and notebook unit shipments. As a result, that business unit lost $7 million but somehow still much better than the $22 million lost in the previous quarter and $323 million lost in the same quarter a year ago. Even so, their processor ASP actually increased both sequentially and year over year, indicating that it was not due to a failure of being able to sell their CPUs.

Their Graphics and Visual Solutions business unit grew leaps and bounds with an increase of revenue by 29% sequentially as well as 165% year over year. AMD noted that this was primarily driven by their semi-custom SoCs, most notably the APUs located within the Microsoft Xbox One and Sony Playstation 4, which shipped in total volumes of 7 million units in their first quarter of availability. They also noted that GPU ASP increased both sequentially and year over year, indicating that their ability to sell GPUs has not decreased even though the PC market continues to shrink. AMD’s choices that they made years ago when creating their GCN architecture also resulted in great GPU sales thanks to Cryptocurrency mining and people buying dozens of graphics cards to do so.

The only bad part of AMD’s earnings was actually their outlook for the first quarter of 2014. They stated that their revenue is expected to dip a whopping 16% which has scared investors to such a degree that today there was a sell off of AMD shares totaling 12%. Granted, most of that actually happened in after hours trading yesterday after AMD released their earnings and did their earnings call. Admittedly, 16% is quite the drop in revenue going from quarter to quarter, but realistically AMD would have a very hard time showing as strong of revenue in a seasonally slow Q1 when compared to Q4. But even so, 16% is quite a staggering number and I believe that this is why AMD’s stock fell so hard today. If they had reported anything under 10%, I think a lot of people would have simply considered it a seasonality adjustment more than anything.

Now, looking at 2014, AMD is clearly going to continue to take in revenue and profits from their console design wins with the Xbox One and PlayStation 4, but I’m not entirely sure they’ll ever see a quarter like that from those sales ever again. As such, AMD will have to search for revenue and profit elsewhere, and I don’t think Apple is suddenly going to start shipping millions of Mac Pro desktop PCs to professionals anymore. Sure, it has two GPUs which is great for AMD, but it still ships with Intel CPUs and Apple has lost a lot of favor from the professional market as it is already.

If AMD wants to attack the professional market like they say they want to, they are going to have to attack Nvidia directly and take some of their 90% + market share from them. In order to do so, AMD is going to have to really work closely with software developers to make sure their cards run as fast or faster than Nvidia and do it RELIABLY. One of the biggest problems for AMD in the past has been their reliability, which we admittedly haven’t had a chance to look at recently. We actually recently reviewed Nvidia’s professional graphics solutions and found that their strength was in their speed AND reliability, which many professionals find the most important metrics for a GPU (and GPU driver). I also believe that AMD needs to harness their Mantle API in applications like ones put out by Autodesk and to get AutoCAD, 3ds Max and Maya to be optimized properly for Mantle. By doing so, I believe that AMD could not only have faster solutions for these applications, but also significantly more stable solutions as well. They also need to find their way into accelerator applications like OTOY’s Octane renderer, which currently runs exclusively on Nvidia hardware and could result in AMD selling a lot more GPUs than they do now.

Overall, the outlook for AMD in 2014 is fairly opaque because we don’t know how well Kaveri will do, because we don’t know how far along HSA is coming. AMD needs to harness HSA and Mantle to their maximum potential in order to be able to squeeze out profitability from the full year of 2014. The ended the year with strong sales of FX and APU sales as well as GPU sales, but they clearly need to get more design wins in notebooks and tablets. I think that they know this and are probably working as hard as they can to utilize these tools in order to compete with the likes of Intel and Nvidia who both currently own the lion’s share of the markets that AMD is competing in.